Abercrombie's Q3 Humbles Estimates

One of the many reasons investors like flannels flogger Abercrombie & Fitch(NYSE: ANF) so much is that you just don't see as much clearance merchandise sitting on the racks as you do at many apparel retailers -- and when you do, it's generally snapped up quicker than you can say "parachute pants."

The mega-markdowns at Abercrombie, simply put, don't last long -- and it looks like the recent slashing of the company's share price is coming to an end as well following last night's after-close fiscal third-quarter (ended Oct. 30) earnings report. Despite a slight early-morning downturn, the stock has still regained a hefty slice of the ground lost last month after word spread that someone on the inside snuck downbeat sales data to Lazard Freres & Co. analyst Todd Slater.

Following the October imbroglio, the company quickly issued a statement saying back-to-school sales were strong and it was comfortable with Wall Street's consensus earnings estimate of $0.31 per share.

Abercrombie followed that up last night by giving doubters what should be taken as a dressing-down for those who dared doubt the Columbus, Ohio-based fashion dictator, turning in quarterly EPS of $0.36, up 50% from $0.24 last year and a nickel better than expected.

Some investors may consider this a sign that management can be trusted again following the unfortunate leak; cynics might say the company intentionally low-balled its guidance to guarantee a blowout quarter.

Nevertheless, shareholder lawsuits have cropped up since last month: Abercrombie said in its conference call yesterday that it has enough insurance to cover related costs.

Among other key numbers, revenues, gross income, operating income, and net income rose 24.8%, 36.3%, 55%, and 56.1%, respectively, year-over-year as margins improved significantly across the board. Cash and equivalents rose $33.1 million from the end of Q2. (For the company's full press release, click here.)

Same-store sales rose 11% from last year's quarter. Looking forward, Chairman and CEO Mike Jeffries said he believes the company is "well-positioned for the holiday season" and expressed his comfort with Wall Street's $0.73 per share consensus EPS estimate for the fiscal year's final three-month period based on November selling trends. Look for 17 new full-line stores and 13 of the company's kids' "abercrombie" format stores to open during the quarter, bringing the total to 250 stores (35 in the little "a" format). Another 30 to 50 of the kids' stores are on the way next year.

Given that Abercrombie has beaten its earnings estimates in every quarter since going public about three years ago, what should investors make of the targets -- especially when the company humbles even its own guidance? Probably nothing. Just follow the numbers; they're impressive enough without being compared to the best guesses of a few CFAs.

After all, internal targets are set at 30% earnings growth, 20% square-footage growth, and same-store sales growth in the 5% to 6% range. (Abercrombie, which generally doesn't release monthly sales data, now says it will alert investors if it believes it will miss its targeted comps figure.) Those figures have been easy pickings for Abercrombie over the last several years.

"We continue to consistently outperform our growth model," Jeffries said in the call. "The Abercrombie & Fitch brand has never been stronger." That should be reassuring to investors, who've become accustomed to go-go growth numbers and high-flying share prices over the last three years.

It's the way of the shopping trade: miss the sales and you're stuck paying full price again. That appears to be happening with Abercrombie stock, and Jeffries told investors yesterday that most of his company's closeouts will be gone by Thanksgiving week as well. Prospective bargain hunters be warned.

A replay of the company's conference call is available by dialing 1-800-625-5288 and entering the code 460246. It can also be found online by clicking here.